I'm refinancing a mortgage of ~$800k. This is our only/primary house and we do not haven any intent to move in the forceable future.
There are multiple parameters/choices and they make my head hurt.
One choice is how many points to buy.
Another choice is whether to do a no-cost refinance. (And it looks like the no-cost option is adding some costs to the points).
| Rate |
APR |
Payment |
Points |
Additional closing costs |
Total closing costs |
| 2.875% |
2.891% |
$3338 |
-$6,035 |
~$10,795 |
$4,760~=~$10,795-$6,035 |
| 2.750% |
2.765% |
$3285 |
-$3,017 |
~$10,795 |
$7,778~=~$10,795-$7,778 |
| 2.625% |
2.649% |
$3232 |
$1,006 |
~$10,795 |
$11,801~=~$10,795+$1,006 |
| 2.490% |
2.542% |
$3175 |
$4,023 |
~$10,795 |
$14,818~=~$10,795+$4,023 |
| 2.375% |
2.455% |
$3,127 |
$7,040 |
$10,795 |
$17,835 |
| No-cost: |
|
- |
~$900-$1200 more |
- |
- |
| 2.875% |
2.890% |
$3419 |
-$5,151 |
|
-$486~ |
| 2.750% |
2.765% |
$3365 |
-$2,060 |
|
-$486~ |
| 2.625% |
2.659% |
$3310 |
$2,060 |
|
-$486~ |
| 2.490% |
2.552% |
$3252 |
$5,151 |
|
-$486~ |
| 2.375% |
2.465% |
$3203 |
$8,241 |
-$19,056 |
-$486 (they pay me) |
Since we're currently at the historical rate minimum I think that it makes sense to lock in the lowest rates I can get. So, I plan to get 2.375% (0.8 points = $7040). It seems that the naïve break-even period will be around 5 years compared to the higher rate of 2.490%.
But then I looked at the full closing costs and thought about making this a no-cost refinance. The money that I can spend on closing costs can be invested at higher percent than the 2.375% mortgage so it makes sense to me to not pay a lot of cash outright.
Only two things bother me here: The loan becomes significantly bigger (+$19,056) and the points are now ~$1000 costlier.
The monthly payment with no-cost 2.375% will be $3203 - $76 more compared to $3127 I'd get if I paid the closing costs. So, I'm exchanging paying $17835 for paying $76 for 360 months totaling $27360. Seems OK...
Am I making a mistake by going with the lowest rate I can get and making the refinance no-cost?
One scenario I see where my choice would be wrong is if the mortgage rates go down significantly. But it does not seem likely to me.
P.S. A third option is to either put only ~half of the closing costs on the loan, since another half is just the prepaid interest, taxes etc, that I'll just get from the old escrow.
The fourth option is to take more cash out of the mortgage and invest it.
The fifth option if to pay-off ~$30,000 and make the mortgage non-jumbo, expanding my loan options. But I do not like this option, since I'll be immediately parking lots of cash in the house. Maybe in December the jumbo limits will be raised.
All options I have in mind:
- Pay closing costs with cash ($17835), reducing my reserves. Monthly payment: $3127
- Put the cost of points and the fees on the loan (+~$10795), keeping my reserves at the same level. Monthly payment: $3127
- Put the cost of points and the fees on the loan (+$19,056). Monthly payment: $3203
- Cash-out money from the loan. Monthly payment: $3203
- Pay-off ~$30,000 to make the mortgage non-jumbo and get new rates.
- Wait until December and pray that the jumbo limits are raised and the rates are still low.
P.P.S. I really do not understand the formula that the banks use to price the points. It seems to be really weird that I have a choice of 8+ different no-cost loans and they all have different rates and monthly payments.
